The Risk your Member Takes with You

When we lend money, we only focus on the risk of not getting repaid by the borrower. We don’t just focus on the financial capacity of the borrower to repay us, but also, we take into consideration their character too. This is all well and good, but should your borrower or member be doing the same due diligence on you?

Sometimes we forget that we, on the banking and lending side, also present a risk to the borrowers and depositors. It wasn’t until the Great Depression that deposit insurance was created to provide depositors with a basic level of comfort that the government would help honor some deposits. Today, that deposit insurance covers balances up to $250,000. While that may sound like a lot of money to me and you, there are people and organizations that need to keep more than that on deposit, and they do so at their own peril. Those large depositors are betting that your institutions are safe and sound and can pay back those large deposits on demand. And, they are assuming your institution won’t fail in the meantime!

Even when we lend money, the borrower is taking a risk with us. Just like there are dishonest borrowers in the world, there can be dishonest lenders as well. Some lenders may not be upfront about certain loan fees and conditions. When lenders fail to communicate the true cost of the transaction, the borrower may grow upset and feel as though the lender was intentionally misleading them. Some lenders make loans under narrow, specific conditions, hoping that the borrower defaults so the lender may charge higher fees or even repossess collateral, like a prized piece of real estate.

One of the worst situations is when a lender promises a loan will be funded, but then later retracts the offer. Imagine how upset you would be to have a car loan or home loan pulled away from you after your lender said you were good to go. Now the borrower may be in an embarrassing position, where they will fail to honor a contract, or they have already spent money on closing costs, only to not wind up with a loan.

In the business lending world, this is especially important. I once witnessed a bank promise a construction loan to a borrower to build a commercial real estate project. As it turned out, the construction loan was over the legal lending limit of the bank, and that bank failed to find another bank to help participate. Unfortunately, the lender started advancing the loan anyway. When the loan hit the bank’s lending limit, the bank stopped advancing funds to the borrower. Construction would have halted had the borrower not had extra money to help finish the construction process himself, but he was very disappointed with the bank, and that bank had a potential lawsuit on its hands.

It is important to keep in mind we need to exhibit high character standards and professionalism, just like we expect from our borrowers or members. They take a big risk by working with us, and assume we can honor what we promise too.